THE ARABIAN GULF ECONOMIES · 2019. 6. 25. · THE ARABIAN GULF ECONOMIES ASSET RICH, TRANSFORMING,...
Transcript of THE ARABIAN GULF ECONOMIES · 2019. 6. 25. · THE ARABIAN GULF ECONOMIES ASSET RICH, TRANSFORMING,...
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THE ARABIAN GULF ECONOMIESASSET RICH, TRANSFORMING, AND FULL OF OPPORTUNITIES
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CONTENTS
SUMMARY 03
STRONG ASSET POSITION 03
REVENUE DIVERSIFICATION AND DEFICIT CONTROL 04
FOSSIL FUEL SUBSTITUTION – GREAT! BUT NOT SO FAST 05
TRANSFORMATION AND DIVERSIFICATION PROGRAMS IN FULL SWING! 08
LOOKING AHEAD 11
CONCLUSION 11
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SUMMARY
We are frequently asked these days: “Are the Gulf economies entering a period that might
lead to deep economic turmoil?” It is a legitimate question. After all, shale oil production has
kept oil prices depressed, the replacement of fossil fuels is unstoppable and, in the past, the
drive to transform and diversify some of the Gulf economies was, perhaps, half-hearted.
Our answer to this question is, “No”. We believe that the combination of significant reserves
of liquid assets and low debt levels can finance the local governments’ ambitious economic
transformation programmes, thereby creating a plethora of opportunities for most sectors
of the economy. This isn’t the first time there have been questions about the sustainability
of the GCC economies. Many other oil & gas producing countries have not been able to deal
with economic crises. Yet the Gulf economies have shown themselves to be fundamentally
resilient to turmoil.
GCC economies (and societies) will have the precious lead time they need to transform into
post-oil economies, because fossil-fuel substitution (a good thing) will not happen as fast as
many people believe it will.
STRONG ASSET POSITION
The Gulf economies have $43.7 trillion in liquid and quasi-liquid assets ($3.3 trillion in
sovereign wealth funds and $40.4 trillion in proven oil & gas reserves) – which equates to
$841 million in such assets per capita (Exhibit 1). This will provide the required collateral
to finance the formidable economic transformation and diversification plans they
are implementing.
Exhibit 1: GCC total asset values by category (2010-2030)
2010 2015 2020 2025 2030
Oil
Gas
SWF
US$ TRILLION
50
0
80
70
60
10
20
30
40
Source: Rystad Energy, Oxford Economics, WSF Institute, Preqin, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 3
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REVENUE DIVERSIFICATION AND DEFICIT CONTROL
Historically, government revenues in the Gulf region have depended heavily on oil & gas
sales. This is still the case today; however, the weight of this support is trending downwards
(Exhibit 2) through the introduction of taxes. The VAT launch in the UAE, Saudi Arabia, and
Bahrain has proved to be a success beyond the revenue it has generated.
Massive current account surpluses, relevant fiscal surpluses, and low debt levels have made
the Gulf economic fundamentals among the strongest in the world (Exhibit 3). After the oil
price fall of 2014, there was significant deterioration of these fundamentals. Five years on,
they are weaker but have stabilised.
Exhibit 2: GCC government revenues by category (2010-2030)
US$ TRILLION
2010 2015 2020 2025 2030
Revenue from hydrocarbons
Revenue from non-hydrocarbons
0
100
200
300
400
500
600
700
Source: Oxford Economics, IMF, Bahrain Ministry of Finance, Central Bank of Kuwait, Oman Ministry of the National Economy, Qatar Central Bank, Saudi Ministry of Finance, UAE Ministry of Economy, Haver Analytics, Oliver Wyman analysis
Exhibit 3: GCC fiscal deficit, debt and current account deficit/surplus as percentage of GDP (2010-2030)
PERCENTAGE OF GDP
-20
0
20
40
2010 2015 2020 2025 2030
Current account
Government debt
Fiscal deficit
Source: Oxford Economics, IMF, Bahrain Ministry of Finance, Central Bank of Kuwait, Oman Ministry of the National Economy, Qatar Central Bank, Saudi Ministry of Finance, UAE Ministry of Economy, Haver Analytics, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 4
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FOSSIL FUEL SUBSTITUTION – GREAT! BUT NOT SO FAST...
Total energy demand will continue to grow steadily in the foreseeable future. However, this
will go hand-in-hand with the rise of renewables, which is evidently unstoppable and a boon
for the future of our planet.
Fossil fuels are used for many different purposes, with electricity generation being the
most important (Exhibit 4). The two categories under most pressure to be replaced are
transportation and plastic manufacturing (because of their polluting effects), but they
account for only one fifth of the total fossil fuel consumption. Electricity generation and
industry consumption will continue to be the key demand drivers for fossil fuels for the
foreseeable future.
Exhibit 4: Global fossil fuel usage breakdown (2010-2030)
15,000
0
20,000
2010 2015 20252020 2030
5,000
10,000
Transport
Industry
Electricity generation
Building
Petrochemical (Plastic)
Others
UNITS: Mtoe
Source: International Energy Agency Annual Energy Outlook 2018
Copyright © 2019 Oliver Wyman 5
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It is expected that over time cleaner sources of energy will assume a larger share of the
energy supply (Exhibit 5). For instance, coal – the most polluting of all energy sources – will
slowly be replaced by a mix of alternative sources: renewables, nuclear, and natural gas,
the least polluting of all fossil fuels. Gas will continue to have an increasingly relevant role in
electricity generation for the foreseeable future.
Market penetration of electric-powered vehicles (again, a good thing) is rising fast but such
vehicles will still only represent 13 percent of total vehicle sales by 2025. The take-up rate will
only increase significantly when battery production costs come down and electric vehicles
become competitively priced without government subsidies (Exhibit 6). More importantly,
transportation will represent only 18 percent of global fossil fuel usage by 2020.
Exhibit 5: Energy sources for global electricity generation (2010-2030)
1,000
2,000
3,000
4,000
5,000
6,000
2010 2015 2020 2025 2030
0
IN Mtoe
Renewables
Nuclear
Gas
Oil
Coal
Source: US Energy Information Administration Energy Outlook 2018
Exhibit 6: Global transportation powering – breakdown by type (2010-2030)
120
100
0
PASSENGERS EV SALESIN MILLIONS
2010 2015 2020 2025 2030
40
20
80
60
Conventional diesel
Hybrid
Conventional gasoline
Electricity
EV VS. COMBUSTION ENGINEBREAK-EVEN POINT
Source: International Energy Agency Annual Energy Outlook 2018, US Energy Information Administration
Copyright © 2019 Oliver Wyman 6
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Moreover, while it is expected that the substitution of fossil fuels with cleaner sources of
energy will continue unabated, it is worth noting that the Gulf region’s cost per barrel is
the lowest in the world (Exhibit 7). This means that the last barrel of oil will be extracted in
the Gulf.
Exhibit 7: Production cost per oil barrel, in US$ (2020)
GLOBAL LIQUIDS COST OF SUPPLY WEIGHTEDAVERAGE PRICE (US$/BARREL)
50
0
CUMULATIVE LIQUIDS PRODUCTION IN 2020 (MM BARRELS PER DAY)
70
BREAK-EVEN
0 10
OnshoreMiddle East
OffshoreMiddle East
Deepwater
UltraDeepwater
RoW onshore
Extra heavy oil
North American
ShaleOil
Sands
Russianonshore
20 30 40 50 60 70 80 90 100
60
10
20
30
40
15
29
34 3539 40
4348
51
Source: Rystad Energy, Evercore ISI Research
We can conclude that the pace of substitution of fossil fuels is not going to be as rapid as
many expect. This will provide the Gulf economies with the precious lead time they need to
transform and diversify.
Copyright © 2019 Oliver Wyman 7
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TRANSFORMATION AND DIVERSIFICATION IN FULL SWING!
Most Gulf countries have now embarked on ambitious transformation and diversification
programmes, and this will result in a declining contribution of the oil & gas sector to GCC
GDP (Exhibit 8). The UAE, a pioneer for change in the region, has a diversified economy
with oil & gas representing only 30 percent of its total GDP. All other Gulf countries have
also started major programmes, albeit at different speeds. In Saudi Arabia, which makes
up almost half of the region’s GDP, changes are currently in full swing. They have, globally,
one of the most ambitious programmes being implemented – one that is delivering a visible
impact on the country’s economy and society.
There is more to foster the transformation ahead than just the strong assets position
and the lead time from fossil fuel substitution: a growing population, substantial fixed
capital investments, and the GCC countries’ stability in general, are – and will continue to
be – key enablers of this transformation.
Exhibit 8: GCC GDP breakdown by sectors (2010-2030)
1,500
0
2,000
2,500
US$ BILLION
2010 2015 2020 2025 2030
500
1,000
1,500
0
2,000
2,500
500
1,000
Services
Manufacturing
Oil & gas
Other
2,500
0
500
1,000
1,500
2,000
2010 2011 20202012 20162013 20152014 2017 2018 2019 2021 2022 2023 2024 20262025 2027 2028 2029 2030
Source: Oxford Economics, IMF, Bahrain Ministry of Finance, Central Bank of Kuwait, Oman Ministry of the National Economy, Qatar Central Bank, Saudi Ministry of Finance, UAE Ministry of Economy, Haver Analytics, Oliver Wyman analysis
Copyright © 2019 Oliver Wyman 8
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The GCC’s population is young (30 percent were below the age of 21 in 2019) and it is
expected to continue growing over the next 10 years. Alongside this, there is a positive
trend in the population’s literacy level, with 32 percent expected to have completed
tertiary education by 2025 (Exhibit 9). This young, more-educated group will be the
workforce of the future, needed by both corporations and governments to operate under
a new economic model. The population growth will also increase internal consumption
and therefore support the GDP growth.
Substantial investments in fixed assets have enabled the remarkable transformation of the
UAE economy, and the same is now happening with other GCC countries, with KSA leading
the pack. These investments are putting in place a state-of-the-art infrastructure that will
make the Gulf countries one of the most attractive regions in the world to live, work, invest,
and create (Exhibit 10).
In a region plagued by conflicts and general instability, the GCC is an island of stability
and predictability (Exhibit 11). Business friendly regulations, low tax regimes, and relaxed
immigration policies have contributed to the ease of doing business. A notable illustration
of this is that the UAE has moved from #68 to #11 in the World Bank ease of doing
business index, in just ten years. The GCC will continue to be a magnet for both people
and businesses, not only from the Middle East and Africa region but also from the rest of
the world.
Exhibit 9: GCC population growth and percentage of population with tertiary education
MILLION PERCENTAGE OF POPULATION
0
10
20
30
40
50
60
70
2010 2015 2020 2025 2030
Age above 21
Percentage of population with university degree
Age under 210
15
10
5
20
25
30
35
40
45
Source: OECD, UNESCO
Copyright © 2019 Oliver Wyman 9
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Exhibit 10: GCC fixed capital investment
US$ BILLION PERCENTAGE OF GDP
0
100
200
300
400
500
600
700
800
2010 2015 2020 2025 2030
Fixed capital percentage of GDP
Fixed capitalinvtestment0
15
10
5
20
25
30
35
Sources: UN, Ministry of Finance and National Economy, Fitch Solutions
Exhibit 11: 2019 Marsh Risk Map
80-100
Stable Unstable
70-79 60-69 50-59
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LOOKING AHEAD
We see a plethora of opportunities for most economic players – both domestic and
international – with limited associated risks.
The areas which we see providing the most relevant growth opportunities over the next five
years are as follows:
• Overall restructuring of the public sector;
• Diversification into renewables and petrochemicals by the national oil companies and utilities;
• Fintech boom, and consolidation among financial services players;
• Revamping of the transportation sector and the construction/modernisation of the associated infrastructure;
• Expansion of tourism in terms of both what is on offer for tourists and source markets for tourism;
• Transformation of the private and public sectors driven by digitalisation and analytics.
In our view, the two biggest risks to take into consideration for the GCC economies are:
governments slowing down the pace of change (in terms of diversifying their economies),
and a steep reduction in the prices of fossil fuels. In our opinion, neither of these scenarios is
impending at the moment. That said, a global recession – one which the market expects to
start within the next two years – will temporarily create constraints on the Gulf governments’
abilities to spend. As such, a recession will have multifold, adverse impacts on the region’s
economies, not least through the decline in demand for oil & gas.
CONCLUSION
It is our view that the Gulf’s governments’, societies’ and corporations’ unshakable
willingness to transform their economies, combined with a massive stock of liquid assets
and low debt levels, will enable the financing of this transformation and help to create a
prosperous future for the region.
It is imperative that governments and corporations alike take advantage of the precious lead
time at hand in the transition from fossil fuels to other energy sources. To do so, they must
accelerate the implementation of their various transformation programmes and ensure they
are delivered as planned.
Copyright © 2019 Oliver Wyman 11
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Many people state that the only reason why the Gulf countries have developed and are wealthy, is because they have immense oil & gas reserves. However, there are many other countries that have even bigger oil & gas reserves, and abundant water and farmland, and yet struggle to feed their populations. The oil & gas wealth of the Gulf countries has enabled one of the biggest economic booms in human history, but this has only materialised because these countries also had – and still have – the willingness to advance and improve themselves!
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Copyright © 2019 Oliver Wyman
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AUTHOR
Pedro [email protected]
CONTRUBUTORS
Victor RaynaudSenior [email protected]
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